IIP - A Mirror Filming the Changes in the Total Production Within the Economy

This blog addresses the importance of Index Of Industrial Production and factors that affects it.

The Index of Industrial Production (IIP) pictures out the growth and variations in the industrial production that is the only measure of total number of products manufactured over a period of time in the country. It is used for formulating policies by the Ministry of Finance, Reserve Bank of India, etc. to address social and economical issues.

The industrial growth adds a new GDP number hence it becomes relevant for calculating the estimated GDP of the country. The significance of IIP is not limited to the government but it also assists the business analysts, financial experts, and the private industries in different purposes.

What is the Index of Industrial Production (IIP)?

We know that the Gross Domestic Product measures the overall activity of the economy including production, but is there a specific indicator to measure the industrial activity in the overall economy?

Yes, the IIP is the mirror that tracks changes in the level of industrial production by including many industries in a specific period of time. In short, it depicts how fast or slow the growth is of industrial production in the country.

The IIP is a short term indicator of industrial growth, until the Annual Survey of Industries (ASI) and National Accounts Statistics are released.

The Index of Industrial Production is published by the Central Statistic Office (CSO) under the Ministry of Statistics and Programme Implementation on 12th of every month with a time lag of six weeks from the year against which the performance of industries is measured.

Growth rate shrunk of eight major industries

The combined index of 8 core industries was 119.9 for July 2020, witnessing a fall of 9.6% in comparison to that of July 2019. The overall growth from April to July 2020 –21 was -20.5%. The eight core industries comprise 40.27% of the weight of items.

Factors impacting the Index Of Industrial Production

Some of the important factors affecting the industrial production are stated below:-

Oil Prices

As a consumer when one hears that the oil prices are rising, one mostly thinks about the price of petrol as it is mainly needed every day by individual as a fuel to power vehicles. A significant amount is spent on the fuel even when the petrol prices go up. The use of oil is not just limited to being a diesel fuel but is also used in industries as a raw material. When the oil prices increases, it makes the production process of industries expensive than before, which leads to higher prices of output.

This burden of higher prices bared by the industries is shifted to the ultimate consumer resulting in inflation and reduced production in industries due to decreased demand.

Inflation

Inflation is a situation where the price of goods and services increases and the ability to purchase things from money reduces which leads to a reduction of production of the industries due to decrease in demand by the consumer. The high inflation in the country affects the ability to purchase in the people, due to which they are left with lesser money, pertaining to a decrease in output produced by the industries.  Also, the farm products act as the basic material from which most of the industrial products are made. When there is inflation in the farm products, the production process becomes expensive and the burden of increased prices is barred by the consumers, who in turn make less demand.

Overall, the production of industries is declining as inflation has hit a forty month high at 5.54% in November 2019 from 4.62% in October 2019, which is way higher than RBI’s target of 4% for the medium-term.

Decrease in Government Spending

By spending on industries, the government can promote industrial growth.

If the government reduces its spending on infrastructures such as roads and railways, then this acts as a blockage in the availability of the output to the consumers, ultimately affecting the industrial production.

Consumption Spending

The fall in demand by the consumer leads to the slow growth of industries, thereby resulting in declining the IIP.

The country is facing an economic slowdown, where the industrial production of major industries is showing negative growth. One of the reasons for industrial slowdown is attributed to low wages and income leading to a fall in consumption spending and decreasing output of industries.

Imports

Imports are goods and services bought by people, business and the government from another country. If the people of the country imports goods from another country’s industry can lead to fall in demand or shutdown of the industries within one’s own country ultimately affecting the Index of Industrial Production (IIP).

Availability Of Finance

Providing finance is a necessary step for smooth operations of the industries, but the finance system faces many drawbacks such as:-

• Inadequate finance available for large industries
• Moneylenders charging high rate of interest from small and village industries
• Backward Financial system
• Unsatisfactory interest structure for different types of loan, leading to a decline in the production of industries and affecting IIP data.

Lower Agricultural Growth

Agriculture sector provides basic material to the industries to produce the output. The natural resources are extracted by the agriculture sector and further processed by the industries making the agriculture sector as the backbone of the industrial sector.

For example :- cotton produced by the farmers is taken by the industries as the basic material for manufacturing apparels, therefore the growth of an agriculture sector is linked to the growth of the industrial sector.

The growth in the agriculture sector was 5.5% in 2017-2018 which declined to 2.7% in 2018-2019 due to insufficient rainfall, being one of the reasons for the slowdown in the industrial sector.

Government Programmes And Policies

The policies and programmes adopted by the government impacts the industrial production directly or indirectly.

For example: - when the government announced demonetisation in the country several sectors were hit hard along with the Micro Small Medium Enterprises (MSME). Many MSME’s had to shut down their working as these industries went through an unstable phase.

Quality Of Human Resources

Skilled and trained workforce employed in the industries lead to industrial growth. The resources such as land, capital etc becomes useful because of the input of a human resource. So, when the labour in the industries lacks motivation or are not suitably qualified can result in hampered productivity.

Technological Innovation

The technological factors include machines or automatic devices introduced in the production process. Technological innovation is responsible for maintaining industrial growth and facing competition from the emerging and existing substitute industries. Improvement in all the machines and automatic devices in the past has affected the IIP figures.

Uses Of Index Of Industrial Production (IIP)

• The Index of Industrial Production (IIP) depicts changes in the production of output, when the industrial production increases, the growth of the economy increases.
• The Index of Industrial Production (IIP) shows the current trend in the economy. They help to find out the trend of imports, industrial production, and prices in the economy.
• The Index of Industrial Production also helps in forecasting future trends, which are significant for the business's future operation or production activity.
• It also shows the demand by the consumers, when the consumer will demand output there will be a growth of that industry.
• It is used by the investors to know the monthly growth rate of different companies within one industry.
• Also, when the production of various industries is increasing in the economy, it can be said, the economy is witnessing a boom in general, similarly when the production of industries decreases the economy is said to be facing a slowdown.

Other Indicators For Industrial Growth

Industrial Production Index

Industrial Production Index  measures output in the manufacturing, mining, electric, and gas industries from the year against which the performance of industries is measured. It also measures the capacity of industries as well as the total output produced by them with respect to the total capacity. It is used widely in the USA, China, and Europe.

Purchasing Managers Index

Purchasing Managers Index presents the trends in the manufacturing and service sectors. It informs the decision makers, analysts and investors about the market conditions that are shrinking, staying the same or expanding.

Many western countries have their own PMI, including industrialized countries such as China, Japan, Australia, and much of Europe.

The manufacturing PMI was recorded at a 2 year low in October 2019. The score has decreased from 51.4 in September 2019 to 50.6 in October 2019.

Value Added By Activity-

It shows the value added by different industries for different activities, specifically indicating total output added by the industries in a country.

In 2019, the average total value added by industries was 715.36 billion U.S dollars.

While several indicators are available for indicating industrial production growth, Index of Industrial Production is still widely used in economies.